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Debt and Civilization

It’s amazing how long debt has been a feature of both civilization and wars. Michael Hudson has done a lot of digging (almost literally) into ancient Sumerian and Babylonian records and recently was interviewed. His recent interview is at Renegade Economists radio show, transcript at his site. In this interview he notes that debt was…

… first documented clearly in around 2400BC when the Sumerian city of Lagash went to war with Umma and it is said that Umma had to pay reparations at the going interest rate, which was one shekel per mina per month, which works out at 20% per year. The calculation ran into the millions of bushels of grain that Umma owed, and so Sumer erected a stone on the boundary between Lagash and Umma saying “You owe us this much money, and if you do not pay it we are going to go to war.” So the first compound interest on record was money owed by a city as war reparations to the victor.

The features of debt and war reparations rings a bell with many fans of  20th century history, where the debt burden caused by First World War reparations were instrumental in the rise of Nazism. Hudson notes also that:

…no economy in history has ever grown as fast as its debts have grown. And that is why business cycles slow down – as debts grow faster than outputs, more and more money is diverted away from spending on goods and services, there is less direct investment, less new hiring and increased vacancies, and people have to pay more to the financial sector and that turns out to be a means of stifling growth.

The financialization of the economy, where finance capital captures rents from debt as an increasing share of productive capcity (usually measured by GDP), crowds out the productive uses of debt and leads to increased inequality and the pauperization of the people.

When foreclosure and the morality of “all debts must be paid” is enforced by the society, or in our case the world political economy, then we have the debt downward spiral. The need to service debt payments leads to austerity, austerity leads to lower output, lower output leads to lower tax revenues to pay down debt and the debt crisis deepens, the deepening debt crisis leads to new calls by the creditor class to more austerity, seizures of real assets such as the national or personal treasures, foreclosure.

There is an alternative: debt forgiveness, Jubilees, debt write-off, it is just disagreeable to to the creditors and they are the banks and their managers who are profiting wildly from the growth in inequality. The calls for foreclosure, ‘market clearing,’ austerity, cutting of government spending for the people, will increase.

The calls for austerity will continue until the apotheosis of debt is reached. In some countries that may lead to civil unrest on a scale not seen for many years. My opinion is that we will see police and army called out against citizens, at first responding to orders to fire on the co-members of the 99% and later refusing the order to fire. When the police and army refuse to quell riots against debt imposed by creditor friendly political structures, those political structures will collapse. Parts of this scenario are already being reached in Europe, e.g. Greece.

This summer will be long and hot.

Cross-posted at

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